SMARTPHONES: Xiaomi Chases Value, Dumps Apple Approach

Bottom line: Xiaomi's adoption of Costco as
its new role model and abandonment of Apple looks like a realistic
move, and could better position the company to survive over the
next 5 years amid a looming market shakeup.

Xiaomi eyes chic cheap image

Smartphone maker Xiaomi appears to be a company with an
identity crisis, with reports that charismatic CEO Lei Jun has
dumped former role model Apple (Nasdaq: AAPL) in favor a new model in
US bulk-item supermarket operator Cosctco (Nasdaq:
CSCO). Many will probably smile at this not-so-subtle shift at
Xiaomi, which was one of China's hottest companies just two years
ago when Lei liked to think of himself as China's Steve Jobs.

But the adoption of a new role model in Costco probably speaks
volumes about how Lei sees his company going forward, as he tries
to salvage its core smartphone business following a difficult last
two years. That fall from grace includes a 40 percent drop in sales
in its home China market in last year’s fourth quarter, causing its
market share to slip to 7.4 percent, or about half of what it
commanded just a year earlier, according to IDC.

Lei realizes he needs to do something soon to right his ship, and
earlier this year announced a major acceleration of Xiaomi's drive
to open brick-and-mortar stores to complement his original
Internet-only sales model. (previous post) Now in an interview in India, Lei says
he has ditched Apple and is declaring he aims to be more like
Costco going forward. (English article)

For anyone who isn't familiar with Costco, the chain has expanded a
bit beyond its origins as a provider of cheap, bulk foods for value
conscious shoppers. I'll admit I'm not aware of its latest
developments, but when I lived in the US and more recently Taiwan,
where the company also has a few stores, Costco had become quite a
fashionable place to shop, and carried all kinds of non-food items
like electronics and clothing.

In a nutshell, Costco was somehow able to take the idea of being
thrifty and make it quite fashionable. Friends in Taiwan would plan
entire days around a trip to Costco, often making such trips into a
social event as much as a shopping trip, bolstering the concept
that it's chic to be cheap.

That appears to Lei's message now, as he tries to find the right
positioning for his company in the brutally competitive smartphone
market. It's already quite clear that Xiaomi is no Apple, a fact
that became evident a couple of years ago when Apple's chief
designer accused the Chinese company of being a copycat like all
the rest. It's also quite clear that Xiaomi doesn't exactly have
any hugely cutting-edge technology that would justify charging the
premium prices that Apple does.

Eye on Middle, Low Ends

In the absence of any chances at the premium end, Xiaomi appears to
be setting its sights on the lower to middle end of the market,
with an aim to trying to bring the chic factor back to its
products. That's certainly one of Lei's specialties, as he was able
to transform Xiaomi phones into a hip and trendy product almost
instantly a few years back using savvy marketing tactics, including
creation of online clubs and artificial product shortages to
generate buzz.

The big bottleneck in all this is actual products, which is what
tripped Xiaomi up in the first place. Costco is known not only for
its cheap prices and clean stores, but also because it offers good
quality products for those prices. By comparison, Xiaomi quickly
stumbled after its earlier rise because its products gained a
reputation as mostly lookalikes that were even perhaps a bit
inferior to many similar smartphones on the market.

I honestly haven't seen anyone using a Xiaomi smartphone these
days, thought the company's latest higher-end model did get some
pretty good reviews for its unusual design when it was first
unveiled last October. (previous post) One of my friends even said he tried to
buy one of the phones online during some recent promotional events
but was unsuccessful, indicating that at least someone is
interested in these phones.

At the end of the day, the Costco approach is probably much more
realistic and suitable for a young company like Xiaomi that still
has a lot to learn. When the history books are written, if Xiaomi
survives for a while longer some might say that Lei Jun became the
victim of hubris in his early days due to too much success that was
unsustainable. I'd give the company an increasingly good chance of
surviving this difficult period, and would generally applaud Lei
for his new Costco approach and jettisoning of Apple as role
model.